v· - municipal securities rulemaking board · this letter is to serve both as a certification that...

v·National JewishQ Health'

Science Transforming Life ®

Main Health Campus1400Jackson St.Denver, CO80206

303.388.4461800.423.8891

njhealth.org

October 26,2012

Ms. Patricia PetersVice President, Corporate TrustUMBBank1670 BroadwayDenver, CO 80302

RE: Colorado Health Facilities Authority Revenue Bonds (National Jewish Medical andResearch Center Projects) Series 2005

Dear Ms. Peters:

This letter is to serve both as a certification that no event of default under Section 10.1 ofthe Loan agreement related to the above bond issue has occurred or is continuing, andthat we have no knowledge of an event that with the passage of time or the giving ofnotice or both would constitute an event of default under Section 10.1 thereof.

Per § 5.2-1 of the Series 2005 National Jewish Reimbursement and Pledge Agreement,please find the following information enclosed with this letter:

• June 30, 2012 Debt Compliance Letter• June 30, 2012 Accountant's certificate of no default (required by Series 2005)• June 30, 2012 Audited Financial Statements

In addition, we did not receive a management letter for the period ending June 30, 2012.There have been no material events.

If you have any questions, please feel free to contact me at (303) 398-1004 or KelliVarney at (303) 398-1003.

Chief Financial Officer

#1 Respiratory Hospital in the U.S., Since 1998. u.s. News & World Report

BKD~CPAs & Advisors

Wells Fargo Center1700 Lincoln Street, Suite 1400

Denver, CO 80203-4514303.861.4545 Fax 303832.5705 www.bkd.com

Independent Accountants' Report

Board of DirectorsNational Jewish HealthDenver, Colorado

We have audited, in accordance with auditing standards generally accepted in the United States ofAmerica, the consolidated statement of financial position of National Jewish Health and Subsidiary(National Jewish) as of June 30, 2012, and the related consolidated statements of activities and cash flowsfor the year then ended, and have issued our report thereon dated October 11, 2012.

In connection with our audit, nothing came to our attention that caused us to believe that National Jewishfailed to comply with the terms, covenants, provisions or conditions of Section 10.1 of the loan agreementwith Colorado Health Facilities Authority dated January I, 2005, insofar as they relate to accountingmatters. However, our audit was not directed primarily toward obtaining knowledge of suchnoncompliance.

This report is intended solely for the information and use of the Board of Directors and management ofNational Jewish, Colorado Health Facilities Authority, UMB Bank, and JP Morgan Securities, Inc., and isnot intended to be and should not be used by anyone other than these specified parties.

October 11,2012

experience BKDPraxitx·:

MEMBER ,.GLOBAL ALLIANCE OFINDEPENDENT FIRMS

BKD~CPAs & Advisors


Denver, CO 80203-4514303.8614545 Fax 303.832.5705 www.bkd.com

Independent Accountants' Report


We have audited, in accordance with auditing standards generally accepted in the United States ofAmerica, the consolidated statement of financial position of National Jewish Health and Subsidiary(National Jewish) as of June 30, 2012, and the related consolidated statements of activities and cash flowsfor the year then ended, and have issued our report thereon dated October 11, 2012.

In connection with our audit, nothing came to our attention that caused us to believe that National Jewishfailed to comply with the terms, covenants, provisions or conditions of the Indentures of Trust datedMarch 1,2012, and January 1,2005, insofar as they relate to accounting matters. However, our audit wasnot directed primarily toward obtaining knowledge of such noncompliance.

In accordance with the Indentures of Trust discussed above, a calculation ofthe long-term debt servicecoverage ratio is attached as Schedule A.

This report is intended solely for the information and use of the Board of Directors and management ofNational Jewish, Colorado Health Facilities Authority, UMB Bank, and JP Morgan Securities, Inc., and isnot intended to be and should not be used by anyone other than these specified parties.

October 11,2012


MEMBER ,.GLOBAL ALLIANCE OFINDEPENDENT FIRMS

Schedule A

National Jewish Health and SubsidiaryCalculation of Long-term Debt Service Coverage Ratio

Year Ended June 30, 2012(In thousands)

Income available for debt serviceIncrease in net assetsAdd:Depreciation expenseInterest and amortization expenseGifts released from restrictionNet unrealized loss on marketable securitiesNet unrealized loss on refunding bonds

Total income available for debt service

$ (5,007)

9,7301,89116,1941,8171,175

25,800

Less:Gifts received that are restricted by the donor

Net income available for debt service(16,761)

$ 9,039

Parity indebtedness payments due in fiscal 2013 $ 2,905

Ratio of net income available for debt service to parity debt 3.11

Minimum ratio required by Indentures of Trust 1.l5

Note: This schedule represents the calculation ofthe ratio of net income availablefor debt service to parity indebtedness payments due in fiscal 2013 of theobligated group, as defined in the Indentures of Trust dated March 1, 2012,and January 1,2005. National Jewish is the only member of the obligatedgroup under the Indentures of Trust.

2

National Jewish Health and SubsidiaryConsolidated Financial Statements

(With Independent Auditors' Report Thereon)June 30, 2012 and 2011

National Jewish Health and SubsidiaryJune 30, 2012 and 2011

Contents

Independent Auditors' Report 1

Consolidated Financial Statements

Consolidated Statements of Financial Position 2

Consolidated Statements of Activities .4

Consolidated Statements of Cash Flows 6

Notes to Consolidated Financial Statements 7

BKD~CPAs & Advisors


Denver, CO 80203-4514303.8614545 Fax 303.832.5705 www.bkd.com

Independent Auditors' Report


We have audited the accompanying consolidated statements of financial position of National JewishHealth and Subsidiary (National Jewish) as of June 30, 2012 and 2011, and the related consolidatedstatements of activities and cash flows for the years then ended. These financial statements are theresponsibility of National Jewish's management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States ofAmerica. Those standards require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significant estimates made by management, as wellas evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, thefinancial position of National Jewish as of June 30, 2012 and 2011, and the changes in its net assets andits cash flows for the years then ended in conformity with accounting principles generally accepted in theUnited States of America.

October 11,2012


MEMBER ~.GLOBAL ALLIANCE OFINDEPENDENT FIRMS

National Jewish Health and SubsidiaryConsolidated Statements of Financial Position

June 30, 2012 and 2011(In thousands)

2012 2011

Current assets:Cash and cash equivalents $ 1,048 $ 6,694

Short-term investments 25 21

Accounts receivable:Patient care, net of estimated uncollectibles of $19,323 and $16,114,

respectively 19,693 16,454Grant revenue receivable 4,888 5;270Bequests, net of allowance for uncollectibles of$50 and $293,

respectively 3,729 4,087Pledges receivable, current portion, net of allowance for uncollectibles

of$168 and $211, respectively 1,385 1,748

Other 3,427 3,089Total receivables 33,122 30,648

Assets held by trustees - current portion 1,856 2,136

Prepaid expenses 1,862 1,298Drugs and supplies 1,270 1,326

Total current assets 39,183 42,123Assets whose use is limited:

Internally designated assets 41,202 42,954Assets held by trustee, net of current portion 2,015 2,627Assets reserved for gift annuities 9,273 10,055Other 381 390

Total assets whose use is limited 52,871 56,026Other assets:

Long-term investments 55,986 52,857Contributions receivable under unitrust agreements 4,154 4,5%Pledges receivable, net of current portion and allowance for

uncollectibles of$1,493 and $906 respectively 1,%2 1,974Beneficial interest under perpetual trust agreements 10,497 10,156Unamortized bond and lease issuance costs 639 591Goodwill, net of accumulated amortization of$656 and $656, respectively 900 900Other 2,378 487

Total other assets 76,516 71,561Property and equipment, at cost:

Land 13,086 12,523Buildings 117,174 114,279

Equipment and software 76,296 71,132Construction in progress 1,432 2,386

207,988 200,320Less accumulated depreciation (109,735) (103,405)

Property and equipment, net 98,253 %,915

Total assets $ 266,823 $ 266,625

See Accompanying Notes to the Consolidated Financial Statements 2

National Jewish Health and SubsidiaryConsolidated Statements of Financial Position

June 30, 2012 and 2011(In thousands)

2012 2011Current liabilities:

Accounts payable and accrued expenses $ 9,808 $ 9,405

Line of credit 7,066

Current portion of workers ' compensation 434 487

Accrued salaries, wages, and employee benefits 6,388 7,161

Unearned grant revenue 1,618 1,507

Estimated settlements with third-party payors 562 484

Current portion of accrued vacation 2,300 2,422

Current portion oflong-tenn debt, including capital lease 4,507 4,293

Current liability under annuity contracts 1,525 1,676

Current liability under unitrust agreements 147 82

Total current liabilities 34,355 27,517

Accrued vacation 1,475 1,255

Other 4,062 1,908

Liability under annuity contracts 9,282 10,055

Liability under unitrust agreements 1,781 658

Long-term debt, net of current portion 45,851 50,208

Total liabilities %,806 91,601

Net assets:Unrestricted 93,099 101,308

Temporarily restricted 33,955 32,731

Permanently restricted 42,963 40,985

Total net assets 170,017 175,024

Total liabilities and net assets $ 266,823 $ 266,625


National Jewish Health and SubsidiaryConsolidated Statements of ActivitiesYears Ended June 30,2012 and 2011

(In thousands)

Changes in unrestricted net assets:Unrestricted revenue, gains, and other support:

Net patient service revenueHealth initiatives revenueProfessional education revenueFederal grant revenueOther operating revenueMajor giftsDirect mailSpecial events, net of direct donor benefits of$3,073

and $2,671, respectivelyBequestsGift annuity contributionsInvestment income, net

Total unrestricted revenue, gains, and other support

Net assets released from restriction:Net assets released from restriction - grantsNet assets released from restriction - public support

Total net assets released from restriction

Expenses:Academic servicesClinical servicesAdministration and fiscal supportSupport servicesMarketing and health initiativesProfessional educationFund developmentBad debt expense

Total expensesLoss on Debt Refunding(Decrease) Increase in value of split-interest agreements

Total expenses and losses(Decrease) Increase in unrestricted net assets

See Accompanying Notes to the Consolidated Financial Statements

2012 2011

$ 108,857 $ 100,0347,775 9,2612,148 2,47347,674 60,0557,900 7,4721,073 2,0542,386 2,229

253 1,1094,974 3,955282 1,006715 8,160

184,037 197,808

6,693 6,9069,501 6,19216,194 13,098

88,069 97,31757,417 51,41524,120 21,5281l,172 10,%913,604 12,2632,317 1,8598,063 7,6002,546 2,774

207,308 205,7251,175(43) 183

208,440 205,908(8,209) 4,998

4

National Jewish Health and SubsidiaryConsolidated Statements of Activities (continued)

Years Ended June 30, 2012 and 2011(In thousands)

Changes in temporarily restricted net assets:Restricted grant supportMajor giftsDirect mailSpecial eventsBequestsContributions of split-interest agreementsChange in value of split-interest agreementsInvestment Gain, net

Total temporarily restricted revenueNet assets released from restriction - grantsNet assets released from restriction - public supportNet assets moved to permanently restricted - public support

Total net assets released from restrictionIncrease (decrease) in temporarily restricted net assets

Changes in permanently restricted net assets:Contribution sInvestment gain netNet assets moved to permanently restricted - public support

Total permanently restricted gainIncrease in permanently restricted net assets

(Decrease) Increase in net assetsNet assets, beginning of year

Net assets, end of year

2012 2011

7,030 6,544

3,836 2,839

288 343

3,246 1,457

3,025 4,019

71 271

(1,047) 7,924

%9 11717,418 23,514

(6,693) (6,906)

(9,501) (6,192)(79)

(16,194) (l3,177)1,224 10,337

1,637 1,485

341 1,79179

1,978 3,355

1,978 3,355

(5,007) 18,690175,024 156,334

$ 170,017 $ 175,024


National Jewish Health and SubsidiaryConsolidated Statements of Cash Flows

Years Ended June 30, 2012 and 2011(In thousands)

2012 2011Cash flows from operating activities:

(Decrease) increase in net assets $ (5,007) $ 18,690

Items not requiring cashDepreciation 9,730 9,046

Bad debt expense 2,546 2,774Unrealized gains 3,859 (12,998)

Permanently restricted revenue, net (1,978) (3,355)

Loss on disposal of property and equipment 131 20Bond premium and discount amortization 901 26

Changes inPatient care accounts receivable (5,785) (3,735)Grant receivables (308) 78

Bequests receivable 358 (3,530)

Other current assets (845) (437)

Contribution receivable 443 30

Pledges receivable 375 (696)

Beneficial interest under perpetual trust (341) (1,792)

Other assets (1,940) 82Estimated third-party payor settlements 78 136Accounts payable and accrued expenses, workers'

compensation, accrued salaries, wages, and employeebenefits and unearned grant revenue 2,539 1,888

Accrued vacation 98 245

Deferred contributions (9)Net cash provided by operating activities 4,845 6,472

Cash flows from investing activities:Purchases of property and equipment (11,201) (17,520)

Proceeds from sales ofintemally designated assets 9,659 12,022Purchases of internally designated assets (9,067) (8,249)Proceeds from sale of assets held by trustee 893 129Purchases of investments and assets reserved for gift annuities (26,185) (16,263)Proceeds from sale of investments and assets reserved for gift annuities 21,145 14,124

Net cash used in investing activities (14,756) (15,757)

Cash flows from fmancing activities:Line of credit 7,066Proceeds from issuance oflong-term debt 8,750

Repayment oflong-terrn debt (5,043) (3,908)Increase (decrease) in liability under gift annuity agreements (924) 920Decrease in liability under unitrust agreements 1,188 (24)Increase in permanently restricted net assets 1,978 3,355

Net cash provided by fmancing activities 4,265 9,093Net (decrease) increase in cash and cash equivalents (5,646) (192)

Cash and cash equivalents, beginning of year 6,694 6,886Cash and cash equivalents, end of year $ 1,048 $ 6,694

Supplemental schedule of noncash activities:Cash paid for interest $ 1,738 $ 1,840


National Jewish Health and SubsidiaryNotes to Consolidated Financial Statements

June 30, 2012 and 2011

(1) Corporate Organization

(a) Organization

National Jewish Health and Subsidiary (National Jewish), a Colorado nonprofit corporation, is anational referral medical institute engaged in patient care, medical research, and teaching, primarilyin areas of respiratory, allergic, and immunologic medicine. National Jewish is the product of aconsolidation in 1978 between National Jewish Hospital and Research Center, founded in 1899,and National Asthma Center, founded in 1907.

In 2002, the National Jewish Illiquid Assets Holding Company, LLC, a wholly owned subsidiary ofNational Jewish, was incorporated. The purpose of this subsidiary is to hold donated property untilsold. All related intercompany transactions and balances have been eliminated in consolidation.

National Jewish's activities are supported by numerous voluntary organizations and advisoryboards in cities across the United States. The auxiliary organizations, although chartered byNational Jewish, maintain their own financial records and submit the net proceeds of theirfundraising activities to National Jewish. Because National Jewish does not exercise financialcontrol over its auxiliary organizations, it does not maintain accounting records concerning theiractivities, and the accompanying consolidated financial statements do not reflect such activities.

National Jewish is a nonprofit corporation as described in Section 501(c)(3) of the InternalRevenue Code (IRC) and is exempt from federal income taxes on related income pursuant toSection 501 (a) of the IRC and a similar provision of state law.

(b) Compliance with Health Care Industry Laws and Regulations

All hospitals and other providers of healthcare are subject to numerous laws and regulations offederal, state, and local governments. These laws and regulations include, but are not limited to,matters such as licensure, accreditation, government health care program participationrequirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse.

Recently, government activity has increased with respect to investigations and allegationsinvolving several healthcare providers throughout the country concerning possible violations offraud and abuse statutes and regulations by these healthcare providers. Violations of these lawsand regulations can result in expulsion from government healthcare programs together withimposition of significant fines and penalties, as well as significant repayments for patient servicespreviously billed. Management believes that National Jewish is in substantial compliance withapplicable government laws and regulations.

(2) Summary of Significant Accounting Policies

(a) Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assets and liabilities at thedate of the consolidated financial statements and the reported amounts or revenue and expensesduring the reporting period. Actual results could differ significantly from those estimates.

7


June 30,2012 and 2011

(b) Contributions, Promises to Give and Bequests

National Jewish receives funding from a number of sources. Contributions received from donorsare considered to be available for unrestricted use unless specifically restricted by the donor.Amounts received that are designated for future periods or restricted by the donor for specificpurposes are reported as temporarily restricted or permanently restricted support that increasesthose respective net asset classes. Gifts and investment income that are originally restricted by thedonor and for which the restriction is met in the same time period are recorded as temporarilyrestricted and then released from restriction. When the donor restriction expires, the contribution isreclassified to unrestricted net assets and reported in the consolidated statements of activities as"net assets released from restriction - public support." All expenses directly related to donorrestrictions are included in the appropriate expense category as a reduction in unrestricted netassets on the accompanying consolidated statements of activities.

Unconditional promises to give that are expected to be collected within one year are recorded atfair value. Unconditional promises to give that are expected to be collected in future years are alsorecorded at their estimated fair value, which represents the present value of their estimated futurecash flows. Amortization of the related present value discounts is included in contribution revenue.Conditional promises to give are not included as support until the conditions placed on the gift bythe donor are substantially met.

Bequest income is recognized when all ofthe following criteria are met: (1) National Jewish hasreceived notification of the donor's death; (2) National Jewish has a copy ofthe valid will or trustdocument evidencing the bequest; and (3) the value ofthe gift can be reasonably estimated.Accrued bequest income is shown as temporarily restricted until received.

(c) Pooled Income Gifts

National Jewish also receives pooled income gifts. Under the terms of these contributions, the giftsof various donors are pooled and invested as a group. Each donor is allocated a percentage oftheassets, referred to as units. The donor is paid the income, as defined under the arrangement, earnedon the donor's assigned units. Upon the donor's death, the value ofthese assigned units reverts toNational Jewish. The remainder interest in the assets received is recognized as temporarilyrestricted contributions revenue in the period in which the assets are received from the donor. Thecontribution is measured at the fair value of the assets to be received, discounted for the estimatedtime period until the donor's death. The contributed assets are recognized at fair value whenreceived. The difference between the fair value ofthe assets received and the revenue recognizedis recorded as deferred revenue, representing the amount of the discount for future interest.

(d) Beneficial Interest in Perpetual Trusts

National Jewish receives perpetual trusts in which it has the irrevocable right to receive the incomeearned on the trust assets in perpetuity, but never receives the corpus. These trusts areadministered by third parties and are recognized as contribution revenue and as an asset uponnotification of the trust's existence. The contribution is measured at the fair value of the trust'sassets, which approximates the present value ofthe estimated future cash receipts from the trust'sassets. The revenue is classified as permanently restricted support. Annual distributions from thetrusts are reported as unrestricted investment income unless restricted by the donor.

8


June 30,2012 and 2011

(e) Charitable Remainder Trusts

National Jewish is the beneficiary in various charitable remainder trusts in which a donorestablishes and funds a trust with specified distributions to be made to a designated beneficiary orbeneficiaries over the trust's term. Under the terms of the trust, National Jewish receives the assetsremaining upon termination of the trust. The distributions to the beneficiaries may be for aspecified dollar amount, an arrangement called a charitable remainder annuity trust (CRAT), or fora specified percentage of the trust's fair value determined annually, an arrangement called acharitable remainder unitrust (CRUT). Some CRUTs limit the annual payout to the lesser ofthestated percentage or the actual income earned. Obligations to the beneficiaries are limited to thetrust's assets. Contributions are recognized in the period in which the trust is established. Forthose trusts in which National Jewish is the trustee, the assets are recorded at fair value whenreceived, and the liability to the donor's beneficiary is recorded as the present value of theestimated future payments to be distributed over the beneficiary's expected life. The amount ofthecontribution is the difference between these amounts and is classified as temporarily restrictedsupport. Changes in actuarial assumptions are recognized in the consolidated statements ofactivities as changes in value of split-interest agreements in the temporarily restricted net assetclass. Income earned on trust assets, gains, and losses is reflected in the consolidated statements ofactivities. Adjustments to the liability to reflect amortization ofthe discount or revaluation of thepresent value of the estimated future payments to the beneficiary are reflected in the consolidatedstatements of activities. Upon the death of the beneficiary, the liability is closed, and any balanceis recognized as a change in the value of split-interest agreements and is reclassified to eithertemporarily restricted or unrestricted net assets as appropriate.

For those trusts of which National Jewish is not the trustee, the agreement is recognized as anunconditional promise to give. National Jewish recognizes, as temporarily restricted contributionsrevenue and as a receivable, the estimated fair value of the contribution which represents thepresent value of the estimated future benefits to be received when the trust assets are distributedupon termination ofthe trust. Adjustments to the receivable to reflect amortization of the discountor revaluation of the present value of the estimated future benefits are recognized as changes in thevalue of split-interest agreements. Upon the death ofthe beneficiary, the receivable is closed, theassets received from the trust are recognized at fair value, and any difference is reported as achange in the value of split-interest agreements and is reclassified to either temporarily restricted orunrestricted net assets as appropriate.

(f) Charitable Lead Trusts

National Jewish is the beneficiary in a charitable lead annuity trust (CLA T) in which a donorestablishes and funds a trust with specific distributions to be made to National Jewish over aspecified period. The contribution is recognized in the period in which the trust is established. Forthe trust of which National Jewish is not the trustee, the agreement is recognized as anunconditional promise to give. National Jewish recognizes its beneficial interest in the assets astemporarily restricted contributions revenue and as a receivable, the estimated fair value of thecontribution which represents the present value of the estimated future cash flows. Distributionsfrom the trust are reflected as a reduction in the receivable and as reclassifications from temporarilyrestricted net assets to unrestricted net assets.

9


June 30, 2012 and 2011

(g) Gift Annuities

National Jewish receives charitable gift annuities under terms of which the donor contributes assetsto National Jewish in exchange for a promise to pay a fixed amount for a specified period of timeto the donor or to individuals or organizations designated by the donor. Assets received under giftannuity agreements are recognized at fair value when received. A corresponding annuity liabilityis recognized as the present value of future cash flows expected to be paid to the assignedbeneficiary. Unrestricted contribution revenue is recognized as the difference between these twoamounts. Adjustments to the annuity liability to reflect amortization of the discount and changes inthe life expectancy of the beneficiary are recognized in the consolidated statements of activities aschanges in the value of split-interest agreements in unrestricted net assets. Upon the death of thebeneficiary, the annuity liability is closed, and a change in the value ofthe split-interest agreementsis recognized.

(h) Grant Revenue

Research grant awards are accounted for as either contributions or exchange transactions based onthe provisions of the award document. To the extent that grants are contributions, they arerecognized as temporarily restricted support until conditions placed on the award by the grantingagency have been satisfied. The related revenue is reclassified to unrestricted net assets as therequired restrictions are satisfied and is reported in the consolidated statements of activities as "netassets released from restriction - grants." All expenses directly related to grant agreements areincluded in the academic services expense category as a reduction in unrestricted net assets on theaccompanying consolidated statements of activities.

(i) Cash and Cash Equivalents

Cash and cash equivalents include investments in highly liquid debt instruments with originalmaturities ofthree months or less, excluding amounts whose use is limited by internal designationor other arrangements.

(j) Short-term Investments

Short-term investments consist principally of bond funds and other marketable securities.Investments in equity securities with readily determinable fair values and debt securities are carriedat fair value as determined by an estimate based on significant other observable inputs.

(k) Financial Instruments

Financial instruments consist of cash and cash equivalents, short-term investments, accountsreceivable, assets limited as to use, long-term investments, contributions receivable, beneficialinterest in perpetual trusts, accounts payable, and long-term debt. The carrying amounts reportedin the balance sheets for cash and cash equivalents, short-term investments, accounts receivable,assets limited as to use, long-term investments, contributions receivable, beneficial interest inperpetual trusts, and accounts payable approximate fair value. The estimated fair value of long-term debt is discussed in Note] 2.

10


June 30, 2012 and 2011

(I) Debt Issuance Costs

Bond issuance costs and bond discounts related to the issuance of bonds are deferred and amortizedover the life of the respective bond issue using the straight-line method. Additionally, capital leaseissuance costs related to the issuance of capital leases are deferred and amortized over the life ofthe capital lease using the straight-line method.

(m) Goodwill

Goodwill, which represents the excess of the purchase price over the fair value of the net assets ofthe Colorado operations of Sleep HealthCenters, was amortized over a 20-year period prior to2011. Goodwill is evaluated annually for impairment.

(n) Property and Equipment

Property and equipment that is purchased is stated at cost. Contributed property and equipment isrecorded at fair value at the date of donation. If donors stipulate how long the assets must be used,the contributions are recorded as restricted support. In the absence of such stipulations,contributions of property and equipment are recorded as unrestricted support. Depreciation ofbuildings and equipment, including amortization of assets under capital leases, is calculated usingthe straight-line method over the estimated useful lives of the assets in accordance with AmericanHospital Association guidelines.

(0) Net Patient Service Revenue

Net patient service revenue is reported at the estimated net realizable amounts receivable frompatients, third-party payors, and others for services rendered.

Amounts reimbursed for services rendered to patients recovered under various insurance programsare generally less than the established billing rates. The estimated difference is recorded as areduction to net patient service revenue in the period the services are rendered.

Estimated amounts receivable or payable under reimbursement agreements with the Medicare andMedicaid programs are subject to examination and retroactive adjustment. Provisions for estimatedretroactive adjustments under such programs are provided in the period the related services arerendered and adjusted in future periods as final settlements are determined.

(p) Subsequent Events

Subsequent events have been evaluated through October 11,2012, which is the date the financialstatements were available to be issued.

(q) Reclassifications

Certain reclassifications have been made to the 2011 financial statements to conform to the 2012financial statement presentation. These reclassifications had no effect on the change in net assets.

11


June 30, 2012 and 2011

(3) Charity Care and Community Benefits

National Jewish treats all patients who can benefit from National Jewish's care. Financialassistance is made available to patients based upon their ability to pay, and determinations inindividual cases are made during National Jewish's preadmission process. Because NationalJewish does not pursue collection of amounts determined to qualify as charity care, they are notreported as revenue. The estimated charges foregone under this policy were $6,460,000 and$6,559,000 for the years ended June 30, 2012 and 2011, respectively.

National Jewish also participates in the Medicare and Medicaid programs. Under these programs,National Jewish provides care to patients at payment rates determined by governmental agencies,regardless of actual cost.

(4) Net Patient Service Revenue

National Jewish has agreements with third-party payors that provide for reimbursement to NationalJewish at amounts different from its established rates. Contractual adjustments under third-partyreimbursement programs represent the difference between National Jewish's established rates forservices and amounts reimbursed by third-party payors. A summary of the basis of reimbursementwith major third-party payors follows:

Medicare - Inpatient acute care services and substantially all outpatient services rendered toMedicare program beneficiaries are paid at prospectively determined rates per discharge. Theserates vary according to a patient classification system that is based on clinical, diagnostic, and otherfactors. Certain inpatient nonacute services and defined medical education costs are paid based ona cost reimbursement methodology. National Jewish is reimbursed for certain services at tentativerates with final settlement determined after submission of annual cost reports by National Jewishand audits thereof by the Medicare fiscal intermediary.

Medicaid - Inpatient and outpatient services rendered to Medicaid program beneficiaries arereimbursed under a cost reimbursement methodology for certain services and at prospectivelydetermined rates for all other services.

Managed Care - National Jewish has entered into agreements with numerous managed careorganizations. The basis for payment to National Jewish under these agreements is primarilydiscounts from established charges and negotiated fee schedules.

National Jewish provides services in Colorado to patients from throughout the United States andinternationally. As of June 30, 2012 and 2011, National Jewish's net patient receivable for servicesrendered was approximately $19,693,000 and $16,454,000, respectively. Possible credit losses areprovided for in National Jewish's allowance for uncollectible accounts and contractualadjustments.

12


June 30, 2012 and 2011

The mix of gross patient charges from patients and third-party payors is as follows:

Revenue

2012MedicareMedicaidBlue CrossManaged careOther third-party payors

34%7%15%22%22%100010

(5) Grant Revenue

201133%6%15%22%24%100010

Total grant revenue consists of grants from the federal government as well as grants fromcharitable foundations and private corporations. The composition of total grant revenue for theyears ended June 30, 2012 and 2011, is as follows:

2012 2011Federal grantsCharitable foundation and private corporation grants

$ 47,674,0007,030,000

$ 54,704,000

$ 60,055,0006,544,000

$ 66,599,000

(6) Promises to GiveIncluded as receivables are the following unconditional promises to give as of June 30, 2012 and2011:

2012 2011

$ 5,326,0004,380,000

9,208,000 9,706,000

(422,000) (487,000)

8,786,000 9,219,000

(1,660,000) (1,117,000)(50,000) (293,000)

$ 7,076,000 $ 7,809,000

PledgesBequests

$ 5,429,0003,779,000

Unconditional promises to give beforeunamortized discount andallowance for uncollectibles

Less unamortized discount - pledges

Less:Allowance for uncollectibles - pledgesAllowance for un collectibles - bequests

Net unconditional promises to give

13


June 30,2012 and 2011

2012 2011

Amounts due inLess than one year $ 5,459,000 $ 6,493,000

One to five years 1,746,000 1,610,000More than five years 2,003,000 1,603,000

Total $ 9,208,000 $ 9,706,000

Discount rates ranged from 0.64% to 5.73% for both 2012 and 2011.

(7) Internally Designated Assets

The governing body has designated certain assets for strategic and other future purposes. Thecomposition of internally designated assets stated at fair value, as determined by the most recentmarket quotations or an estimate based on significant other observable inputs, at June 30, 2012 and2011, is set forth below:

2012 2011Cash and cash equivalentsCommon stocks and equity fundsInternational securities and equitiesFixed income securitiesU.S. Government and agency obligationsAlternative investments

$ 1,064,0009,341,0008,319,00019,271,000

949,0002,258,000

$ 41,202,000

(8) Long-term Investments

$ 1,406,00010,103,0007,519,000

21,650,0001,598,000678,000

$ 42,954,000

The composition of long-term investments, stated at fair value, as determined by the most recentmarket quotations or an estimate based on significant other observable inputs at June 30, 2012 and2011, is as follows:

2012 2011Cash and cash equivalentsConvertible securities and equitiesInternational securities and equitiesFixed income securitiesU.S. Government and agency obligationsAlternative investmentsPooled income funds

$ 1,915,00020,016,00018,411,0008,538,0001,689,0004,714,000703,000

$ 55,986,000

$ 2,667,00018,112,00015,990,0009,074,0003,011,0003,294,000709,000

$ 52,857,000

14


June 30, 2012 and 2011

(9) Composition of Investment Returns

The following summarizes the investment return and its classification in the consolidatedstatements of activities:

2012

Temporarily PermanentlyUnrestricted Restricted * Restricted

Interest income $ 1,904,000 $ 989,000 $

Gains:

Realized gains 628,000 1,028,000 341,000

Unrealized gains (1,817,000) (2,044,000)

Total gains (l,189,OOO) (1,016,000) 341,000

Total return on investments in

stock and bond portfolios $ 715,000 $ (27,000) $ 341,000

2011

UnrestrictedTemporarilyRestricted *

PermanentlyRestricted

Interest income $ 1,601,000 $ 867,000 $

Gains:

Realized gains

Unrealized gains

699,000

5,860,000

184,000

7,138,000

1,791,000

Total gains 6,559,000 7,322,000 1,791,000

Total return on investments in

stock and bond portfolios $ 8,160,000 $ 8,189,000 $ 1,791,000

* Some amounts included in change in value of split-interest agreements on the statement ofactivities.

15


June 30, 2012 and 2011

(10) Split-interest Agreements

National Jewish has the following split-interest agreements:

2012Assets Lia bilities Net

Gift annuities $ 35,857,000 $ 10,807,000 $ 25,050,000

Unitrust agreements:National Jewish trusteeships 2,257,000 1,928,000 329,000

Third-party trusteeship, net 4,154,000 4,154,000

Term endowments 2,096,000 2,096,000

Pooled income agreements 713,000 464,000 249,000

Total $ 45,077,000 $ 13,199,000 $ 31,878,000

2011Assets Liabilities Net

Gift annuities $ 36,202,000 $ 11,731,000 $ 24,471,000

Unitrust agreements:National Jewish trusteeships 1,125,000 740,000 385,000

Third-party trusteeship, net 4,596,000 4,596,000

Term endowments 2,121,000 2,121,000

Pooled income agreements 719,000 473,000 246,000

Total $ 44,763,000 $ 12,944,000 $ 31,819,000

For the above split-interest agreements, a risk-free rate, obtained using u.s. Treasury bonds at thedate of the gift, was used in conjunction with actuarially determined life expectancies to calculatepresent values. The interest rates ranged from 0.75% to 1.20% as of June 30, 2012, and 1.20% to10.00% as of June 30, 2011.

Though the assets received under gift annuity agreements are generally available for unrestricteduse and the liability is a general obligation of National Jewish, National Jewish is required byseveral states to set assets aside to pay the regulatory minimum annuity obligation. These funds areclassified as assets reserved for gift annuities on the consolidated statements of financial position.These assets are invested in equities and bonds, which are stated at fair value, as determined by themost recent market quotations or an estimate based on significant other observable inputs, andtotaled $9,272,000 and $10,055,000 at June 30, 2012 and 2011, respectively.

(11) Construction in Progress

National Jewish is currently in the process of remodeling and upgrading parts of its campus inorder to better utilize its facilities. In addition, National Jewish's Information Systems andTechnology Department is internally developing software for management of its tobacco cessation

16


June 30,2012 and 2011

programs and for a Patient Portal; both are solely for their own use. Accordingly, at June 30, 2012,National Jewish had eight unfinished projects. Total projected costs are estimated at $ I ,993,000.As of June 30, 2012, National Jewish has expended $1,167,000 related to these projects.

(12) Long-term Debt

Long-term debt at June 30, 20 I2 and 20 I I, is summarized as follows:

2012 2011

Revenue Bonds, Series 2012 $ 26,790,000 $

Revenue Bonds, Series 2005 11,700,000 12,000,000Revenue Bonds, Series 1998 24,370,000Revenue Bonds, Series 1998B 4,366,000Gove School Property 7,750,000 8,750,000

UnamortizedBond (premium)DiscountRevenue Bonds, Series2012 (1,355,000)Revenue Bonds, Series 1998 (375,000)Revenue Bonds, Series 1998B (50,000)

CapitalLease/FinancingArrangement 2,762,000 5,440,00047,647,000 54,501,000

Less: CurrentPortion (1,745,000) (4,293,000)

$ 45,902,000 $ 50,208,000

(a) Series 2012 Revenue Bonds

The Colorado Health Facilities Authority issued $26,790,000 aggregate principal amount of itsRefunding Revenue Bonds Series 2012 (the 2012 Bonds) dated March 1,2012. The proceeds wereused to refund the Series 1998 and Series 1998B Bonds. National Jewish recorded a loss on theearly extinguishment of debt relative to the Series 1998 and Series 1998B Bonds of approximately$1,175,000. The 2012 Bonds are subject to a mandatory sinking fund redemption beginningJanuary 1,2026. Final principal payments on the bonds are due in January 2027. Redemptionamounts are as follows at June 30, 2012:

17


June 30, 2012 and 2011

2012 $ 1,195,000

2013 1,450,000

2014 1,505,000

2015 1,565,000

2016 1,640,000

Thereafter 19,435,000

$ 26,790,000

The 2012 Bonds bear interest at fixed rates varying from 3.00% to 5.00% and are secured by therights to all future revenue derived from National Jewish's property, excluding revenue derivedfrom donor-restricted property if such revenue is unavailable for debt service. The 2012 Bonds aresubject to covenants that impose certain operating and financial restrictions on National Jewish.Management believes National Jewish was in compliance with all covenants for the years endedJune 30, 2012 and 2011.

(b) Series 2005 Revenue Bonds

In January 2005, the Colorado Health Facilities Authority issued $13,500,000 aggregate principalamount of its Series 2005 Revenue Bonds (the 2005 Bonds) dated January 20,2005. Proceedsfrom the 2005 Bonds were used to finance the construction of a clinical and research building, aswell as several renovation projects and equipment.

The 2005 Bonds require annual payments of varying amounts. These payments began onJanuary 1,2007. Final principal payments on the bonds are due in January 2035. Redemptionamounts are as follows at June 30, 2012:

2013 $ 300,000

2014 300,000

2015 400,000

2016 400,000

2017 400,000

Thereafter 9,900,000

$ 11,700,000

The 2005 Bonds bear a variable rate of interest based on the rate at which the bonds could beremarketed at their face value and are secured by the rights to all future revenue derived fromNational Jewish's property, excluding revenue derived from donor restricted property if suchrevenue is unavailable for debt service. The interest rate at June 30,2012, was .23%. The 2005Bonds are backed by an irrevocable transferable letter of credit, which will be automaticallyextended without amendment for an additional period of 12 months beginning on March 1,2013.At June 30, 2012 and 2011, no borrowings were outstanding. The 2005 Bonds are subject to

18


June 30, 2012 and 2011

covenants, which impose certain operating and financial restrictions on National Jewish.Management believes National Jewish was in compliance with all covenants for the years endedJune 30, 2012 and 2011.

(c) Series 1998 Revenue Bonds

The Series 1998 Bonds were refunded and legally defeased on March 20,2012, in conjunction withthe issuance of the Series 2012 Bonds.

(d) Series 1998B Revenue Bonds

The Series 1998B Bonds were refunded and legally defeased on March 20, 2012, in conjunctionwith the issuance of the Series 2012 Bonds.

The fair value of National Jewish's bond issues is determined by quoted market rates. Theestimated fair values of National Jewish's financial instruments are summarized as follows:

2012 2011Carrying

ValueEstimatedFair Value

CarryingValue

EstimatedFair Value

Revenue Bonds, Series 2012



Revenue Bonds, Series 1998B

$ 25,435,000

11,700,000

$ 29,090,000

11,170,000

$ $

12,000,000

23,995,000

4,316,000

12,000,000

25,061,000

4,351,000

(e) Capital Lease

In March 2008, National Jewish entered into a capital lease receiving proceeds of$13,OOO,OOO.The proceeds were used to purchase new radiology equipment for the Institute for BiomedicalImagingt>' and other strategic capital assets. Once equipment was acquired, the financingconverted to a capital lease. Including interest earnings as of June 30, 2012, $13,044,000 has beenused to acquire equipment and software. Included in the equipment and software in theaccompanying financial statements are assets under capital leases, as follows:

2012 2011Classes of assets

Equipment and software $ 13,062,000 $ 13,062,000

Less accumulated depreciation (9,672,000) (7,357,000)

$ 3,390,000 $ 5,705,000

19


June 30, 2012 and 2011

Future minimum lease payments under capital leases, together with the present value of the netminimum lease payments as of June 30, 2012, are as follows:

2013 $ 2,826,000

(64,000)less amount representing interest

Present value of future minimum lease

payments $ 2,762,000

Assets held by trustees represent funds designated by the bond indenture to pay principal andinterest on the 2012 and 2005 bonds and funds held from the Capital Escrow equipment fund forthe purchase of equipment and software. The composition of these funds stated at contractualvalue, which approximates fair value, at June 30, 2012 and 20 II, is as follows:

2012Cash and

CashEquivalents

2012 Bonds

Bond Reserve Fund $ 2,705,000Bond Interest/Principal Fund 383,000

$ 3,088,000

2005 Bonds

Bond Reserve Fund $ 783,000Bond Interest/Principal Fund

$ 783,000

20


June 30, 2012 and 2011

2011

Cash andCash Investment

Equivalents Contracts Total

1998Bonds

Bond Reserve Fund $ $ 2,225,000 $ 2,225,000

Bond InterestlPrincipal Fund 1,176,000 1,176,000

$ 1,176,000 $ 2,225,000 $ 3,401,000

1998BBonds

Bond Reserve Fund $ 387,000 $ $ 387,000

Bond Interest/Principal Fund 192,000 192,000

$ 579,000 $ $ 579,000

2005 Bonds

Bond Reserve Fund $ 783,000 $ $ 783,000

Bond Interest/Principal Fund$ 783,000 $ $ 783,000

(f) Gave Middle School Property Promissory Note

In February 2011, National Jewish entered into a contract with School District No.1, in the Cityand County of Denver and State of Colorado (DPS) to purchase the closed Gove Middle Schoolproperty for $9,000,000. The property is located adjacent to National Jewish's main campus. Thepurchase of the property was final on November 16,2011. This property will be used forfurthering National Jewish's clinical, research and educational missions. Principal payments as ofJune 30, 2012, are as follows:

2013 $ 250,000

2014 250,000

2015 500,000

2016 500,000

2017 6,250,000

$ 7,750,000

21


June 30, 2012 and 2011

DPS issued a non-recourse promissory note in the amount of $8,750,000 which bears interest at afixed rate of 4%. Interest only payments are due in August, November, February, and May of eachyear the note is outstanding. A final payment of the remaining principal outstanding is due in aballoon payment on May 23, 2017. The note is collateralized by the land and building.

(13) Line of Credit

National Jewish has a $15,000,000 unsecured revolving bank line of credit expiring on February 1,2014. At June 30, 2012 and 2011, there was $7,055,000 and $0, respectively, borrowed againstthis line. Interest accrues at the greater of the prime rate less 1%; 30,60, or 90 day LIBOR rateplus 175 basis points; or 2.75%. National Jewish's borrowing interest rate was 2.75% and 3.25%on June 30, 2012 and 2011, respectively.

(14) Commitments and Contingencies

(a) Operating Leases

National Jewish leases certain facilities and equipment under operating leases. The leases expire invarious years through 2018. These leases generally require National Jewish to pay all executorycosts (property taxes, maintenance and insurance). Future minimum rental payments as of June 30,2012, that have initial or remaining non-cancelable lease terms equal to or greater than one year areas follows:

201320142015201620172018

$ 1,281,0001,002,000903,000849,000841,000410,000

Total future minimum lease payments $ 5,286,000

Rental expense for operating leases was approximately $1,788,000 and $1,145,000 for the yearsended June 30, 2012 and 2011, respectively.

(b) Professional Liability

Reserves for professional liability claims were $2,656,000 and $687,000 at June 30, 2012 and2011, respectively. The professional liability claims for fiscal year 2012 are stated at gross, withoutregard for expected insurance recoveries. As a result, NJH recorded an additional $1,972,000 ofprofessional liability reserves and an equal amount of insurance coverage receivables. Fiscal year2011 is stated net of these recoveries. The change in accounting principle is detailed below.

The current portion of the above reserves, $127,000 and $0 at June 30, 2012 and 2011,respectively, is included in other accrued expenses in the accompanying consolidated balancesheets. The provision for losses related to professional liability risks is presented net of expected

22


June 30, 2012 and 2011

insurance recoveries in the consolidated statements of operations and was $206,000 and $411,000for 2012 and 2011, respectively.

Professional liability reserve estimates represent the estimated ultimate cost of all reported andunreported losses incurred through the respective consolidated balance sheet dates. The reserve forunpaid losses and loss expenses are estimated using individual case-basis valuations and actuarialanalyses. Those estimates are subject to the effects of trends in loss severity and frequency. Theestimates are continually reviewed and adjustments are recorded as experience develops or newinformation becomes known. The time period required to resolve these claims can vary dependingupon whether the claim is settled or litigated. The estimation of the timing of payments beyond ayear can vary significantly. Although considerable variability is inherent in professional liabilityreserve estimates, we believe the reserves for losses and loss expenses are adequate based oninformation currently known. It is reasonably possible that this estimate could change materially inthe near term.

In 2012, National Jewish adopted the provisions of Accounting Standards Update (ASU) 2010-24,Health Care Entities (Topic 954): Presentation of Insurance Claims and Related InsuranceRecoveries. This ASU eliminates the practice of netting claim liabilities with expected relatedinsurance recoveries for balance sheet presentation. Claim liabilities are to be determined withoutregard for recoveries and presented gross. Expected recoveries are presented separately. ASU2010-24 is effective for fiscal years, and interim periods within those years, beginning afterDecember 15,2010. There was no impact to National Jewish's results of operations or cash flowsfor the year ended June 30, 2012, as a result of the adoption of this guidance.

(c) Other

National Jewish has certain pending litigation and claims incurred in the ordinary course ofbusiness; however, management believes, based on the advice of legal counsel, that the probableresolution of such contingencies will not materially affect the financial position or operations ofNational Jewish.

National Jewish maintains professional and general liability coverage through a claims-madepolicy with COPIC Insurance. The policy's liability is $1,000,000 per medical incident and$3,000,000 in the aggregate, with deductibles of $100,000 per medical incident/occurrence and$300,000 in the aggregate. In addition, umbrella coverage is provided to National Jewish through aclaims-made policy with COPIC Insurance. The liability limit under the umbrella policy is$40,000,000 combined medical incident and in aggregate.

(d) Risks and Uncertainties

National Jewish invests in various investment securities. Investment securities are exposed tovarious risks such as interest rate, market, and credit risks. Due to the level of risk associated withcertain investment securities, it is at least reasonably possible that changes in the values ofinvestment securities will occur in the near term and those changes could materially affect theinvestment amounts reported in the statements of financial position.

23


June 30, 2012 and 2011

(15) Temporarily Restricted Net Assets

Temporarily restricted net assets are available for the following purposes:

2012 2011

Net assets reserved for future unrestricted uses $ 3,732,000 $ 4,089,000

Restricted for research, education, patient care, and

capital construction 10,473,000 7,799,000

Endowed assets not yet appropriated for expenditure 12,923,000 13,4%,000

Unitrust agreements 4,482,000 4,980,000

Pooled income 2,345,000 2,367,000

$ 33,955,000 $ 32,731,000

Net assets reserved for future unrestricted uses represent contributions not yet received by NationalJewish. Endowed assets not yet appropriated for expenditure represent earnings on permanentlyendowed funds that have not been appropriated for expenditure by National Jewish in a mannerconsistent with the standard of prudence prescribed by SPMIF A. See Note 17 for furtherdiscussion.

(16) Permanently Restricted Net Assets

Permanently restricted net assets consist of the following:

2012 2011

$ 10,497,000

32,466,000

$ 10,156,000

30,829,000

Beneficial interest in perpetual trust agreement

Permanent endowments

Total $ 42,%3,000 $ 40,985,000

National Jewish is an income beneficiary of several perpetual trusts controlled by unrelated third-party trustees. The trust document or the trustees' policies govern the investment and distributionof trust assets. Trust income distributed to National Jewish for the years ended June 30, 2012 and2011, was $359,000 and $425,000, respectively.

(17) Endowment

National Jewish's endowment consists of approximately 74 individual, donor-restricted fundsestablished as endowments and intended for a variety of purposes. The board of directors hasinterpreted the State of Colorado Prudent Management of Institutional Funds Act (SPMIF A) asrequiring the preservation of the fair value of the original gift as of the gift date of the endowment

24


June 30, 2012 and 2011

funds absent explicit donor stipulations to the contrary. As a result of this interpretation, NationalJewish classifies as permanently restricted net assets (a) the original value of gifts donated to thepermanent endowment, (b) the original value of subsequent gifts to the permanent endowment and(c) accumulations to the permanent endowment made in accordance with the direction oftheapplicable donor gift instrument at the time the accumulation is added to the fund. The remainingportion of the donor-restricted endowment fund that is not classified in permanently restricted netassets is classified as temporarily restricted net assets until those amounts are appropriated forexpenditure by the organization in a manner consistent with the standard of prudence prescribed bySPMIF A. The organization considers the following factors in making a determination toappropriate or accumulate donor-restricted endowment funds:

1) The duration and preservation of the fund

2) The purpose ofthe organization and the donor-restricted endowment fund

3) General economic conditions

4) The possible effect of inflation and deflation

5) The expected total return from income and appreciation of investments

6) The resources of the organization

7) The investment policies of the organization

(a) InvestmentPoucy

National Jewish has adopted investment and spending policies for endowment assets that attempt toprovide a predictable stream of funding to programs supported by the endowment while balancingfund growth. Under this policy, approved by the board of directors, the assets are invested in amanner that is intended to produce results that exceed CPI plus 5% per year as measured over arolling 36-month period. To satisfy this long-term rate of return objective, National Jewish relieson a total return strategy in which investment returns are achieved through both capitalappreciation and current yield. National Jewish targets a diversified asset allocation that places agreater emphasis on equity-based investments to achieve its long-term return objectives withprudent risk constraints.

(b) Spending Policy

National Jewish's spending policy varies by the purpose of the endowment and was established bythe board of directors after considering all seven factors outlined by SPMIF A above. Funds withdonor specific purposes have a spending policy of between 3% and 4% of the market value of thefund averaged over the past 12 fiscal quarters preceding the fiscal year in which the distribution ismade.

(c) Funds with Deficiencies

From time to time, the fair value of assets associated with individual donor restricted endowmentfunds may fall below the level that the donor or SPMIF A requires National Jewish to retain as anendowment. There were no such deficiencies as of June 30, 2012.

25


June 30,2012 and 2011

The composition of net assets by type of endowment fund at June 30, 2012:

Temporarily PermanentlyUnrestricted Restricted Restricted Total

Donor-restricted endowment funds $ $ 15,019,000 $ 32,466,000 $ 47,485,000

Board-designated endowment funds 11,561,000 11,561,000

Total Funds $ 11,561,000 $ 15,019,000 $ 32,466,000 $ 59,046,000

Changes in endowment net assets for fiscal year ended June 30, 2012:


Endowment net assets, beginning of year $ 11,589,000 $ 15,616,000 $ 30,829,000 $ 58,034,000

Contribution s 1,637,000 1,637,000Endowment transfer 55,000 (376,000) (321,000)

Investment income 427,000 795,000 1,222,000

Net assets released from restriction (61,000) (61,000)

Gain on sale of investments 30,000 999,000 1,029,000

Unrealized (Ioss)/gain on sale of investments (540,000) (1,954,000) (2,494,000)

Endowment net assets, end of year $ 11,561,000 $ 15,019,000 $ 32,466,000 $ 59,046,000

The composition of net assets by type of endowment fund at June 30, 20 II:


Donor-restricted endowment funds $ $ 15,616,000 $ 30,829,000 $ 46,445,000

Board-designated funds 11,589,000 11,589,000

Total Funds $ 11,589,000 $ 15,616,000 $ 30,829,000 $ 58,034,000

26

National Jewish Health and SubsidiaryNotes to Consolidated Financial Statements .

June 30,2012 and 2011

Changes in endowment net assets for fiscal year ended June 30, 20 II:


Fndowment net assets, beginning of year $ 9,514,000 $ 8,446,000 $ 29,266,000 $ 47,226,000

Contnbutions and other increases 1,563,000 1,563,000Transfer to create board-designated 62,000 (481,000) (419,000)

endowment fund 238,000 698,000 936,000

Investment income (114,000) (114,000)

Net assets released from restriction 142,000 159,000 301,000Gain on sale of investments 1,568,000 6,973,000 8,541,000Unrealized (loss) gain on investments 65,000 (65,000)

Fndowment net assets, end of year $ 11,589,000 $ 15,616,000 $ 30,829,000 $ 58,034,000

(18) Fair Value Disclosure

National Jewish values investments in accordance with Accounting Standards Codification 820,Fair Value Measurements and Disclosures CASC 820). ASC 820 defines fair value, establishes aframework for measuring fair value and expands disclosures about fair value measurements.

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at the measurement date. ASC 820also establishes a fair value hierarchy which requires an entity to maximize the use of observableinputs and minimize the use of unobservable inputs when measuring fair value. The standarddescribes three levels of inputs that may be used to measure fair value:

Levell: Quoted prices in active markets for identical assets or liabilities

Level 2: Observable inputs other than level I prices, such as quoted prices for similar assets orliabilities; quoted prices in markets that are not active, other inputs that are observable or can becorroborated by observable market data for substantially the full term of the assets of liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that aresignificant to the fair value of the assets or liabilities.

27


June 30, 2012 and 2011

The following table represents the fair value measurement of assets recognized in theaccompanying balance sheet measured at fair value on a recurring basis and the level within theASC 820 fair value hierarchy in which the fair value measurements fall at June 30, 2012 and 2011:

Fair Value Measurementsat Reporting Date Using

Description June 30, 2012

Quoted PricesinActive

Markets forIdenticalAssets(Level 1)

Significa ntOther

ObservableInputs

(Level 2)

SignificantUnobservable

Inputs(Level 3)

Short-term investmentsCommon stocks and equity funds $ 10,000 $ 10,000 $ $Bonds and notes 15,000 15,000

Total short-term investments 25,000 25,000

Internally designated assetsCommon stocks and equity funds 9,341,000 9,341,000International securities and equities 8,319,000 8,319,000Fixed income securities 19,271,000 19,271,000U.S. Government and agency securities 949,000 949,000

Alternative investments 2,258,000 2,258,000Total internally designated assets 40,138,000 37,880,000 2,258,000

Assets reserved for gift annuitiesFixed-income securities 6,806,000 6,806,000Convertible securities and equities 2,467,000 2,467,000

Total assets reserved for gift annuities 9,273,000 9,273,000

Long-term investmentsConvertible securities and equities 20,016,000 20,016,000International securities and equities 18,411,000 18,411,000Fixed income securities 8,538,000 8,538,000U.S. Government and agency securities 1,689,000 1,689,000

Alternative investments 4,714,000 4,714,000

Pooled income funds 703,000 703,000

Totallong-tenn investments 54,071,000 49,357,000 4,714,000

OtherBonds and notes 381,000 304,000 77,000

Total other 381,000 304,000 77,000

Total assets above 103,888,000 96,839,000 7,049,000

Cash and cash equivalents not included above 2,979,000

Total $ 106,867,000

28


June 30, 2012 and 2011

Fair Value Measurementsat Reporting Date Using




SignificantOther

ObservableInputs

(Level 2)

SignificantUnobservable

Inputs(Level 3)

Short-term investmentsCommon stocks and equity funds $ 5,000 $ 5,000 $Bonds and notes 16,000 16,000

Total short-term investments 21,000 21,000

Internally designated assetsCommon stocks and equity funds 10,103,000 10,103,000

International securities and equities 7,519,000 7,519,000

Fixed income securities 21,650,000 21,650,000

U.S. Government and agency securities 1,598,000 1,598,000

Alternative investments 678,000Total internally designated assets 41,548,000 40,870,000

Assets reserved for gift annuitiesFixed-income securities 8,600,000 8,600,000

Convertible securities and equities 1,455,000 1,455,000

Total assets reserved for gift annuities 10,055,000 10,055,000

Long-term investmentsConvertible securities and equities 18,112,000 18,112,000

International securities and equities 15,990,000 15,990,000

Fixed income securities 9,074,000 9,074,000U.S. Government and agency securities 3,011,000 3,011,000

Alternative investments 3,294,000Pooled income funds 709,000 709,000

Totallong-tenn investments 50,190,000 46,896,000

OtherBonds and notes 390,000 298,000

Total other 390,000 298,000

Total assets above 102,204,000 98,140,000

Cash and cash equivalents not included above 4,073,000

Total $ 106,277,000

678,000678,000

3,294,000

3,294,000

92,00092,000

4,064,000

$

29


June 30, 2012 and 2011

The following table presents the fair value measurement of assets and liabilities measured at fairvalue on a nonrecurring basis and the level within the fair value hierarchy in which the fair valuemeasurements fall at June 30,2012:

Fair Value Measurementsduring Reporting Year




SignificantOther

ObservableInputs

(Level 2)

SignificantUnobserv-able Inputs(Level 3)

Receivables related to:Contributions and promises to give

Charitable remainder trusts

Gift annuities

Total

$ 1,615,000 $ $ 1,615,000 $

172,000 172,000

878,000 878,000

$ 2,665,000

(19) Employee Benefit Plans

National Jewish maintains a defined contribution plan (the Plan) covering substantially all full-timeemployees. Under the terms of the Plan, National Jewish contributes between 5% and 6% of anemployee's covered wages up to the Social Security wage base and between 10% and 11% ofcovered wages in excess of the Social Security wage base. The Plan contains no provisionsrequiring National Jewish to match a portion of employee contributions. Expenses under the Planfor 2012 and 2011 approximated $4,711,000 and $4,401,000, respectively.

(20) Related-party Transactions

National Jewish from time to time in the normal course of business and within the guidelines of itsconflict of interest policy, has entered into transactions with companies for which certain membersof the companies' management also serve on the board of National Jewish. Management believesthat prices paid by National Jewish have been equal to or less than the prices that would have beenpaid in transactions with parties not related to National Jewish.

30

Science Transforming Life ®

Main Health Campus1400Jackson St.Denver, CO 80206303.388.4461800.423.8891

njhealth.org

~. National JewishQ Health'

October 26,2012

Ms. Patricia PetersVice President, Corporate TrustUMBBank1670 BroadwayDenver, CO 80302

RE: Colorado Health Facilities Authority Revenue Bonds (National Jewish Medical andResearch Center Projects) Series 2012

Dear Pat:

Enclosed with this letter you will find the Annual Financial Information for June 30,2012 as required by section 8 of the Series 2012 National Jewish Loan Agreement. Thisinformation complies with the applicable requirements of this section.

If you have any questions, please feel free to call me at (303) 398-1004, or Kelli Varneyat (303) 398-1003.

~..i ce...1"I

X,. \; 0\ /~~A--,CL~Christine K. Forkner, CFOAuthorized Representative

Enclosures

#1 Respiratory Hospital in the U.S., Since 1998. u.s. News & World Report

Debt Service Coverage

(Decrease) in Net Assets

Add:DepreciationInterest and Amortization ExpenseGifts Released from RestrictionNet Unrealized Losses on Marketable Securitiesincluded in Net Assets Above

Net unrealized loss on refunding bonds

Total:

Less:Gifts Restricted by the DonorNet Unrealized Gains on Marketable Securitiesincluded in Net Assets Above

Net Income Available for Debt Service

Maximum Annual Debt Service (as defined in the LoanAgreement)Coverage Ratio

Maximum Annual Debt Service Including CapitalLeases

Coverage Ratio

(in thousands)Fiscal Year Ending June 30

2012

$ (5,007)

9,7301,891

16,194

1,8151,175

25,798

(16,761 )

$ 9,037

$ 3,210

2.82 x

$ 5,340

1.69 x

National Jewish Health

Sources of Revenues($ in thousands)

Fiscal Year Ended June 30,

2012Amount %

Net Patient Service Revenue $ 108,857 53Grant Revenues 54,704 27Charitable Contributions 21,071 10Health Initiatives 7,775 4Professional Education and Other 10,048 5Investment Income (1) 1,029 1

Totals: $ 203,484 100

(1) Includes both realized and unrealized investment income (loss).

PATIENT CARE SERVICES - Utilization

Fiscal Year Ended June 30,2012

Inpatient AdmissionsAverage Day Program CensusOutpatient Physician Visits

7220.94

75,274


Sources of Gross Patient Service Revenue

Fiscal Year Ended June 30,2012

Medicare 39%

Managed Care 24

Blue Cross 16

Commercial carriers other than Blue Cross 7

Medicaid 7

Self-pay and charity(including Colorado Indigent Care Program) 7

Total 100%


Summary of Revenues and Expenses($ in thousands)

(general and restricted funds combined)

2012

Operating revenue:Patient service revenue, netHealth Initiatives revenueOther operating revenue, net:

GrantsOther

Total operating revenue, net

$ 108,8577,775

54,70410,048

181,384

199,245(17,861 )

13,008

(154)12,854($5,007)

Operating expensesLoss from operationsNonoperating revenue, net:

Net charitable contributions (1)

Investment income & other (2)

Total nonoperating revenue, netExcess (deficit) revenue over expenses

(1) Because certain charitable contributions are accounted for in restricted funds,a portion of the amounts shown under this heading is not available for debt serviceon the bonds. See National Jewish's audited financial statements. Amounts shownare net of related expenses.

(2) Includes unrealized gains and losses and the changes in value of split-interest agreements.


Cash and cash equivalentsShort-term investmentsInternally designated assetsLong-term investments (1)

Available earnings from Permanent EndowmentTOTAL

Average daily operating expense (2)

Days cash on hand

(1) Amount available for operating expenses upon action of the Board.

(2) Annual operating expenses (other than depreciation and amortization,

but including expenses related to charitable contributions) dividedby 365 days in years 2009-2011 and 366 days in year 2012.

Liquidity(Dollars in thousands)

2012

$ 93225

41,202

4,2716,952

$ 53,382

$ 540

98.9

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